Bramwell’s Lunch Beat: Medtronic Riding ‘Tax Inversion’ Wave

Lawmakers fume over lost emails in IRS probe
Stephen Ohlemacher of the Associated Press reported on June 14 that congressional investigators are fuming over revelations on Friday that the IRS had lost a trove of emails to and from ex-IRS official Lois Lerner, a key figure in the agency's targeting controversy.

The IRS said Lerner's computer crashed in 2011, wiping out an untold number of emails that were being sought by congressional investigators, according to the article. The investigators want to see all of Lerner's emails from 2009 to 2013 as part of their probe into the way agents handled applications for tax-exempt status by Tea Party and other conservative groups.

“Do they really expect the American people to believe that, after having withheld these emails for a year, they're just now realizing the most critical time period is missing?” said House Oversight and Government Reform Committee Chairman Darrell Issa (R-CA), according to the article. “If there wasn't nefarious conduct that went much higher than Lois Lerner in the IRS targeting scandal, why are they playing these games?”

The IRS said technicians went to great lengths trying to recover data from Lerner’s computer in 2011, Ohlemacher wrote. In emails provided by the IRS, technicians said they sent the computer to a forensic lab run by the agency’s criminal investigations unit. But to no avail.

The IRS was able to generate 24,000 Lerner emails from 2009 to 2011 because she had copied in other IRS employees. The agency said it pieced together the emails from the computers of 82 other IRS employees. Overall, the IRS said it is producing a total of 67,000 emails to and from Lerner, covering the period from 2009 to 2013.

Medical merger part of ‘tax inversion’ wave
Medtronic Inc.’s agreement on Sunday to buy medical-device maker Covidien PLC for $42.9 billion is the latest in a wave of recent moves designed – at least in part – to sidestep US corporate taxes, Dana Cimilluca, Dana Mattioli, and Joseph Walker of the Wall Street Journal reported on June 15.

Covidien's US headquarters are in Mansfield, Massachusetts, where many of its executives are based. But officially it is domiciled in Ireland, where the main corporate tax rate is 12.5 percent, compared to 35 percent in the United States, home to Medtronic, they wrote.

Such so-called “tax inversion” deals have become increasingly popular, especially among health care companies, many of which have ample cash abroad that would be taxed should they bring it back to the United States.

Medtronic and Covidien announced the deal on Sunday. Covidien stockholders will receive $93.22 per share, composed of $35.19 in cash and 0.956 of a Medtronic share, according to the article. That represents a 29 percent premium to Covidien’s closing share price on Friday. Covidien shareholders will own 30 percent of the combined company.

The deal is subject to regulatory approval in a number of jurisdictions around the world. After completion, the combined company would have its main executive offices in Ireland. Its “operational headquarters” will be in Minneapolis, where Medtronic is currently based.

The true cost of hidden money
Gabriel Zucman, an assistant economics professor at the London School of Economics, who is part of a wave of data-focused economists led by their mentor, Thomas Piketty, of the Paris School of Economics, has put creditable numbers on tax evasion, showing that it’s rampant – and a major driver of wealth inequality, Jacques Leslie of the New York Times wrote on June 15.

“Mr. Zucman estimates – conservatively, in his view – that $7.6 trillion – 8 percent of the world’s personal financial wealth – is stashed in tax havens,” Leslie wrote. “If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn’t changed.”

Fmr KPMG partner Scott London shares cautionary tale before prison
Forbes contributor Walter Pavlo recently talked to ex-KPMG partner Scott London before London begins serving a 14-month federal prison sentence on July 18 after pleading guilty last year to passing inside information from companies he once audited (including Skechers and Herbalife).

London will be interviewed by Gary Zeune during a live, four-hour ethics training class on June 25 promoted as, “… hard hitting, no holds barred, one-of-a-kind live interview.”

Pavlo asked London what life has been like the past year. London said, “Worse than I could have ever imagined, which is the message I want to deliver to others in this class. The consequences to me were tough, but manageable. Dealing with the onslaught of media and the embarrassment of the arrest were the toughest battle of my life. The really hard part was damage to those innocent of my actions; my family, my employer, and friends. My family has all been impacted in different ways, but their lives all changed. They are all fine and doing quite well, but things are different for them and they need to do things differently as a result. I think about my employer and the angst I caused them as well as the clients involved. It goes without saying, but I never intended any harm. My friends have also been great, they all have been supportive. Probably the most difficult was the loss of friends and colleagues at my former employer. Aside from the chance meetings in restaurants and such, I have not seen or heard from any of them. I worked there for nearly 30 years and there are some longtime relationships that are no longer. That part hurts, but I am moving forward.”

Highways need help, but not this way
The New York Times editorial board does not think the corporate tax holiday proposal floating around in the Senate is a good option to fix the Highway Trust Fund.

“Such a reprieve in 2005 was disastrous, in part because it encouraged the hoarding of profits in tax-deferred foreign accounts in anticipation of future tax holidays,” the editorial board wrote on June 14. “Another problem is that a tax holiday is grossly unfair to companies that have no foreign presence and get no break on their tax obligations. It also worsens inequality, because profits that escape taxation during a tax holiday flow largely to shareholders and are subsequently taxed at special low rates, if at all.”

The New York Times thinks there are better ways to replenish the soon-to-be-depleted highway fund, such as President Obama’s proposal to close corporate tax loopholes to finance a four-year, $302 billion highway and public transit program. Contractors and unions are also pressing to index the federal gas tax for inflation and impose other taxes, perhaps on tires or drivers’ licenses.

Corporations and their tax shell games: Time for a global crackdown
The Los Angeles Times editorial board praised the European Commission’s effort to investigate tax breaks offered by three of its members to lure multinational companies, such as Apple, Starbucks, and Fiat. Yet the European Union’s (EU) probe won't touch some of the most controversial profit-shifting techniques, highlighting the need for a global crackdown on corporate shell games, the Los Angeles Times wrote on Monday.

“The European Commission's investigation will examine whether Ireland, the Netherlands, and Luxembourg allowed Apple, Starbucks, and Fiat, respectively, to transfer assets at artificial prices in order to cut their tax bills, amounting to an impermissible state subsidy,” the editorial board wrote. “Fiat and Apple have denied any impropriety, and Starbucks has said it is moving its European headquarters out of the Netherlands. The decisions by the targeted countries, however, are at least as much a focus for investigators as actions by the three companies. If tax officials contorted the transfer pricing rules to attract or keep the companies' business, they did more than reduce the tax revenue collected by other EU states. They put their fingers on the scales of competition and distorted the markets for the companies' goods.

“Sadly, the commission's probe will ignore some of the most notorious techniques used by multinationals to launder profits between subsidiaries in tax havens, such as the ‘Double Irish’ and ‘Dutch sandwich’ maneuvers Google and other tech-centric companies have used to shield foreign earnings even from Ireland's low tax rate,” the editorial continued. “Such dodges are legal, if unseemly, efforts to stuff global earnings into the gaps left by different countries' tax laws. The more markets become global, and the more companies derive their income from assets that can move easily from country to country, the more widespread these practices will be.”

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